Sentral REIT’s 9MFY22 core net profit of RM57.0m (-7.6% YoY) was within ours (73.4%) but above street estimates (79.9%). The drop in YTD performance was mainly due to departure of key tenants from Wisma Technip and Quill Building 2 in 2Q22, which pressured occupancy levels and rental contribution. Overall occupancy rate decreased to 73% (2Q22: 78%). Management is still on the lookout for tenants for the two said properties. Sentral REIT’s performance will remain soft in the coming quarters due to excess supply of office space and macroeconomic challenges. However, occupancy rate should bottom out as negotiations to renew leases expiring in 2023 (8% of NLA) have been encouraging. We retain our forecasts, HOLD call with unchanged TP of RM0.88.

Within estimates. Sentral REIT’s 3QFY22 core net profit of RM18.2m (-1.3% QoQ, -17.7% YoY) brought 9MFY22 core earnings to RM57.0m (-7.6% YoY). We deem the results to be within our expectations (73.4%) but above street estimates (79.9%).

Dividend. None declared, usually in 2Q and 4Q. (YTD: 3.43 sen vs SPLY: 3.40 sen)

QoQ. Revenue edged lower (-3.0%) mainly attributed to lower rental contribution as occupancy levels decline. That said, property opex fell at faster clip (-15.0%), which led to a flattish NPI (+0.7%). Total expenditure rose +5.5%, driven by higher financing costs (+7.6%). Subsequently, core net bottom-line decreased slightly to RM18.2m (- 1.3%).

YoY/YTD. Top line reduced (-11.9% YoY, -6.4% YTD) due to lower revenue contribution from its properties, mainly Wisma Technip and Quill Building 2. Despite a drop in property opex (-9.4% YoY, -8.1% YTD) due to lower property expenses incurred for some properties, NPI shrunk -12.5% YoY, -6.0% YTD. Meanwhile, total expenditure was down -2.3% YoY, -3.3% YTD as a result of lower manager’s fee (- 5.2% YoY, -3.4% YTD) and finance costs (-1.2% YoY, -4.9% YTD). All in, core net profit narrowed -17.7% YoY, -7.6% YTD.

Occupancy and gearing. With nine properties, the overall occupancy rate decreased to 73% (2QFY22: 78%). As for gearing level, it remained at 37.4%.

Outlook. We think the office market will stay challenging in the near term due to current excess and incoming supplies of office space. As such, we believe Sentral REIT’s performance will remain soft in the coming quarters as flattish reversion is expected for its tenancy renewal. We opine there is a risk of rental reversion dipping into negative territory given the macroeconomic challenges. Additionally, management is still on the lookout for tenants for its Quill Building 2 and Wisma Technip which have been left vacant since 2Q22. The silver lining is that we expect a bottoming out of its occupancy rates as negotiations to renew leases expiring in 2023 (8% of NLA) have been positive thus far.

Forecast. Unchanged as Results Were in Line.

Maintain HOLD, TP: RM0.88. We maintain our HOLD call with an unchanged TP of RM0.88. Our TP is based on FY23 forward DPU on targeted yield of 8.6%, which is derived from 5-year historical average yield spread between Sentral REIT and 10- Year MGS. We believe the downside should be cushioned for Sentral REIT due to its attractive dividend yield at around 8% and prime office properties at strategic location

Source: Hong Leong Investment Bank Research - 11 Nov 2022